Today was a very bullish day for stocks, with the Nasdaq well on
its way to challenging its year highs, the indices truncating
their downphases with yesterdays bounces off their ascending
trendlines and today's breakaway gaps to follow through. The
Nasdaq is often said to be the "leading" index, and quick
comparison between the oscillators on the Nasdaq below and those
on the Dow above looks quite bullish for the Dow.
Daily Chart of the INDU

Daily Chart of the COMPX

It was reported today that factory orders rose 0.4 percent in
May, exceeding analysts expectations for no change over the April
number of a revised 3.0 percent drop. Non-defense capital goods
fell 0.8 percent, the second consecutive monthly decline.
Excluding transportation, new orders for factory goods rose 0.8
percent in the month, up from a 2.7 percent decline in April.
Excluding defense, new orders for factory goods rose 0.8 percent
in May, up from a 2.7 percent decline in April.

The Energy Department reported an unexpected 2.1 million barrel
drop in U.S. crude reserves for the week ended June 27. I have
yet to see analysts not surprised by the week's data. Total
inventories are 282.1 million barrels, 11.5 percent lower than
for this week in 2002. Gasoline inventories dropped by 3.2
million barrels to 205 million barrels, while distillate supplies
stood rose 300,000 barrels to 109.7 million barrels total. Surprisingly, August crude closed lower by $.25 at $30.15.

The Mortgage Bankers Association (MBA) announced this morning
that seasonally-adjusted demand for mortgage refinancings, the
MBA refinancing index, rose 4.8 percent to 8,599.1 in the week
ended June 27. Demand for loans with which to buy homes, the
Purchase index, rose 6.6 percent to 438.4. The MBA's market
index, an overall measure of mortgage activity, rose 5.2 percent
to 1,635.5. The average contract interest rate for a 30-year
fixed rate mortgage rose to 5.23%. The MBA estimates that banks
will make $3.3T worth of mortgage loans this year, blowing out
last year's $2.5T record. New construction dropped .9% in May,
however, the third consecutive month of decline.

After our discussion during weeks past concerning the mortgage
data and the sources of liquidity for this year's simultaneous
rallies in real estate, stocks, bonds, gold and other
commodities, I've generated a series of charts to put the current
economic environment in perspective. I've relied on data
published by the St-Louis Fed.

The first chart, which we've been following for several weeks, is
the MZM, and is one measure commonly used to gauge the money
supply.

MZM chart

This 13 year chart speaks for itself- the supply of money has
tripled during this period.

Chart of Fed Funds Rate

During the same time, the Fed Funds rate has dropped
precipitously to its currenty 45 year low at 1.0%. In other
words, the cost of money to banks is at its lowest level in
nearly half a century. It was reported today that U.S. money
market funds are now yielding a record low 0.58 percent on
average.

Chart of Commercial and Industrial Loans

Despite the aggressive devaluation of money by Chairman
Greenspan's Fed commencing in year 2000, loans to business and
industry have decreased in tandem with the Federal Funds rate
during that time. Where, then, has the money reflected in the
skyrocketing MZM chart gone?

Chart of Real Estate Loans

Chart of Total Consumer Credit

It has been loaned to consumers in the form of home equity loans.
For the sake of brevity, I have not reproduced a chart of the
current account deficit, but we've been tracking its increases
to record level after record level. It appears that consumers
have been borrowing in order to purchase homes and foreign goods
in ever-increasing amounts.

Lastly, the effect of the lack of participation of business and
industry in the Fed's tidal wave of liquidity is reflected in the
climbing unemployment rate.

I've attached the foregoing charts because I find the current
economic context fascinating. I also find the widespread
predictions of a "second half recovery" difficult to reconcile
with the picture that the above charts paint, though it does help
us to understand what the Fed has been trying to accomplish, and
its concerns with what it calls "dis-inflation". An uptick in
treasury yields increasing the effective interest rates
applicable to borrowed money, could be disastrous, and for this
reason I expect the Fed to do what's necessary to keep yields
down, as Governor Bernanke has said it would.

By the same token, I am not recommending running out and shorting
everything with a bid. Fundamentals and technicals are two
different worlds as this spring has taught us, and as leveraged
speculators and investors, we must choose our time and our price
judiciously. The markets are littered with bears who had great
ideas and poor timing. As Keynes said, "The markets can remain
irrational longer than you can remain solvent." It's much easier
to trade with the trend of your choice. If you're bullish on the
markets, then the above is the famed "wall of worry".
Furthermore, the current situation is nothing new for the past
several years since the beginning of this secular bear market,
and arguably, it is always darkest before the dawn.

In other news, it was announced on CNBC that the State of
California has been placed on negative credit watch by Standard &
Poors, but I was unable to find a link to the story anywhere on
my wire or in the newsfeeds. The newsday was mostly dominated by upgrades and downgrades, with relatively little hard news. GLD
announced that it was granted Food and Drug Administration
approval for its new anti-HIV drug, Emtriva. The International
Olympic Committee announced that Vancouver, B.C. would be the
host city of the 2010 Winter Olympics, beating Pyeongchang, South
Korea. Much of the competition will take place at the nearby ski
areas around Whistler and Blackcomb, and Intrawest, the developer
and operator of Whistler, was up strongly on the news.

For tomorrow, we have the following economic data due before the
bell:

With a shortened trading session ahead of the 4th of July
weekend, I expect to see thin trading and the consequent wild
volatility that such can cause, helped along by the above full
slate of economic reports. I expect any good news to be taken
very bullishly by equities, on the heels of today's very strong
session. See you at the bell!